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Watch: Europe's response to coronavirus assessed


Azad Zangana

Azad Zangana

Senior European Economist and Strategist

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Azad Zangana, Senior European Economist, discusses the efficacy of Europe's fiscal response to coronavirus.

“The efficacy of central bank actions now diminishing. It is important to focus on fiscal policy as a way to help households and businesses bridge the gap between the lost income that they are now suffering due to the disruption to activity and the costs that have to be met in order to survive.

Focused spending

“Most countries across Europe have taken different approaches, but, largely speaking, they focused on a few key areas.  

“Clearly, increased spending on healthcare has been very important in order to help the population get through the pandemic.

“But also we’ve seen an increase in the provision of benefits, short hours working and replacement of income for those workers that are furloughed and have also lost their jobs in some countries.

“We are also seeing tax breaks for some households and businesses along with many grants being offered to various sectors that are very badly impacted through this lockdown.

Size of stimulus packages

“A lot of large numbers have been bandied around recently by various governments, but you would be surprised to hear that the size of most stimulus packages are far smaller than the large numbers technically announced.

“Germany unveiled an overall package of around 4% of GDP of direct stimulus whereas France and the UK have announced about 2% of GDP. Italy has announced around 1.5% of GDP.

“The other large numbers – for example, the UK recently announced 15% of GDP – this has really been put aside as a contingent liability to help guarantee bank loans.

Reducing risk

“Now the reason why I try to make a distinction is because this will only really be spent if there is take-up of these guarantees and, of course, if loans actually turn bad.

“Does that mean that they don’t help? No, of course they do. They reduce the risk of banks. They will also help banks and encourage them to extend credit to businesses.

“Businesses will need additional liquidity at this time to meet the costs that they will incur so that they can survive long enough for activity to return.

“But I am still a little bit sceptical about how much money has been announced and whether that is going to filter through into the economy itself.

“It certainly helps ensure that the banking system remains resilient and will support confidence within it, which I think is very important at this point in time.

Europe's benefits system

“Europe’s numbers are smaller than what we will see being announced in other parts of the world, especially the US, but that’s because Europe’s social benefits system is far more generous to begin with.

“So the automatic stabilisers – as we refer to them – things like unemployment benefit, essentially, will start to kick in as soon as people apply for them if and when they lose work or lose income. This has to be factored into calculations.

Huge deficits

“Public finances are very likely to come under tremendous strain in the next couple of quarters. We could see public deficits reach 10%, maybe even more, as a share of GDP by the end of this year.

“But, as activity starts to recover, as these kinds of payments subside and, of course, as tax revenues begin to pick back up again, you should start seeing these deficits come down without the need of a huge amount of austerity, unlike what we saw after the global financial crisis.

“So, the hope is that these very broad measures that have been announced will help to make sure that as many companies as possible survive through this period and of course minimise the scale of the rise in unemployment so that we can get back to normal as quickly as possible.”

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